Arm’s forecast disappoints, casting doubt on AI growth

• Chip designer ARM Holdings, which went public last year, gave a disappointing sales forecast for the current quarter
• This suggests that the still-recovering smartphone market could mask the growth of AI

What happened

Chip designer Arm Holdings issued a disappointing revenue forecast on Wednesday (Nov. 6) for the coming year, suggesting that the still-recovering smartphone market could overshadow growth in artificial intelligence. The company expects revenue for the current fiscal year, which ends in December, will be $920 million to $970 million. The midpoint of the range falls below analysts’ forecast of $950.9 million. Excluding certain items, profit is projected to be between 32 and 36 cents per share. That was in line with consensus expectations for an average of 34 cents.

Arm’s stock, which has risen 93% this year in New York, fell 4.5% in after-hours trading. Some analysts attribute the drop to unmet expectations for stronger AI-driven growth. The investment thesis for Arm is that it stands to benefit from a surge in AI computing. However, the company’s forecast fell short compared to AI chip forecasts from companies such as AMD and Nvidia, which directly design chips for AI.

Also read: Arm forecasts results in line with expectations and shares drop

Also read: Arm Gives Tepid Forecast in Sign of Sluggish Chip Demand

What it’s important

Arm’s disappointing forecast also highlights a broader issue for the tech industry: For companies like Arm, which derive most of their revenue from licensing smartphone chips, the still-recovering smartphone market has made it difficult to fully shift focus to AI. Even as AI applications become increasingly important in areas such as automotive, healthcare, and cloud computing.

The dilemma is even more pronounced for smaller semiconductor companies. For example, Mythic, a smaller company focused on artificial intelligence, has also been affected. With limited funds, it has struggled to scale up AI development without significant smartphone revenue, hampering its ability to compete on the same level as larger companies with diversified revenue streams.

This situation underscores a key point: If smartphone demand continues to recover slowly, it could limit the overall growth potential of companies investing in AI, even as AI applications become increasingly important across industries. From an investor’s perspective, companies that rely heavily on smartphones face the risk that AI growth alone may not fully offset smartphone revenue declines in the short term.